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No Money Down – How This CDFI Cut Collateral Requirements to Improve Small Business Capital Access

By Bonnie Crockett

Inequity in business lending has existed ever since entrepreneurship began to include Black- and women-owned businesses. This inequity has only grown since the financial crisis of 2008, becoming even worse during the COVID-19 pandemic. 

Race matters

Black owned businesses represented more than 30 percent of all US small businesses, but Black business owners receive less than 5 percent of SBA 7(a) loan approvals. Black business owners are turned down for loans at a rate twice as high as white business owners, and even when approved they are more than 10 percent less likely to receive the financing they requested

When COVID hit, the overall number of small businesses fell by 22 percent from February to April 2020. Black-owned businesses declined by 41 percent, while white owned businesses declined by only 17 percent. While Black-owned businesses were more likely to be located in COVID-19 hot spots than white-owned businesses, they were also less likely to receive any of the Paycheck Protection Program funding they had requested. Only 43 percent of Black-owned businesses received the PPP funding they requested, compared to 79 percent of white-owned firms.

Gender matters

Women-owned business account for about 40 percent of small companies nationwide; however, they receive only 4.4 percent of total dollars disbursed through conventional small-business loans. The business loans women do get are likely to have more stringent terms and smaller loan amounts than male entrepreneurs with comparable or even less favorable qualifications – this despite the fact that female entrepreneurs who do get loans have better loan performance than their male counterparts in similar financial positions.

Personal wealth matters

Clearly, small businesses owned by Black entrepreneurs and those owned by women entrepreneurs continue to face barriers to credit as a result of implicit bias in lending. However, built-in institutional bias is more easily overlooked.

Virtually all small business loans from traditional banks and SBA lenders require 100 percent collateral. This is even true of some community development financial institutions (CDFIs) that are mission-driven to support underserved communities. But many small business owners simply don’t have these funds. Black- and women-owned businesses are most likely to fall into that category

Business lenders include this built-in bias in their underlying credit requirements, even when they proactively attempt to eliminate bias in loan decisions. The collateral requirement not only presents a barrier to business creation, it prevents successful existing businesses from expanding, hiring, or taking advantage of opportunities because they don’t have the collateral or equity to qualify for growth financing.

A different approach

Baltimore Community Lending, Inc. (BCL), a 501(c)(3) nonprofit CDFI, makes small business loans to startups and emerging small businesses that have strong business plans and reasonable credit, but do not have collateral. The organization also supports existing small businesses that are successful, have reasonable credit, but do not have the collateral to take their business success to the next level. 

Instead of collateral, BCL requires that all applicants complete a free small business training program, which helps them complete a business plan, compile and understand financial statements, and prepare to apply for a loan. A forward-thinking program, BCL also requires its borrowers to meet with a loan officer regularly during the life of the loan in order to head off any challenges they encounter.

BCL believes that requiring entrepreneurs to undergo business training rather than own a home or other substantial assets is a much more equitable way to provide small business loans. This approach can also help mitigate risk and ensure long-term small business success.

Since making its first business loan in 2018, BCL has made 60 transactions disbursing close to $3.9 million in Baltimore City neighborhoods. To date, there have been no write-offs. 

BCL’s hope is that its record of success in supporting small businesses that don’t fit traditional molds will change the way all financial institutions approach small business lending and provide opportunity where it has not existed before.

Bonnie Crockett is the small business director at Baltimore Community Lending.

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